Raising money is getting harder for most firms

NickGodt

NEW YORK (MarketWatch) -- With the financing of two more high-profile leveraged buyouts being delayed on Wednesday, the sell-off in corporate bonds has accelerated across all sectors, lifting the costs of borrowing for most companies, analysts said.

On Wednesday, Wall Street firms were unable to obtain advantageous terms in the credit markets to finance the leverage buy-out of most of DaimlerChrysler AG's
DCX
unit Chrysler by private-equity firm Cerberus Capital Management.

On the same day, banks arranging financing for Kohlberg Kravis Roberts' leveraged buyout of Alliance Boots Plc, a popular UK retailer, failed to sell $10.3 billion in debt. See full story.

The leveraged buy-out of General Motors Corp.'s
GM, -2.10%
Allison Transmission was also delayed on Tuesday, while the online travel firm Expedia Inc.
EXPE, -3.12%
had to significantly reduce plans to buy back some of its shares because of a lack of financing in the corporate bond market.

The trouble experienced by these companies to raise money has little to do with the fundamentals of the firms, analysts said. Instead, it represents the growing determination of investors to put a higher premium on risk, after years of exponential growth in leveraged buy-outs and other types of easy-money deals.

"I think the issue is not so much the sector, it's the overall environment," said John Atkins, corporate bond analyst at IDEAGlobal. "Allison Transmission is arguably the best in the transmission business, they have positive cash flow positive and a very solid business."

Credit markets were jolted as the meltdown in the subprime mortgage market revealed the extent of bad-loans held in portfolios by hedge funds and other investors across the globe. Last month, two hedge funds owned by Bear Stearns
BSC, -3.18%
were almost brought to collapse due to their exposure to these bad home loans.

Wall Street firms feel the pain

Struggling to raise money for leveraged buy-outs while also feeling the pain from bad subprime loans, Wall Street firms are among those finding it increasingly hard to raise money for their own needs.

Financial companies are already taking the brunt of the selling in corporate bonds and will face harder and harder times raising money, said Sid Bakst, senior portfolio manager at Robeco Investment Management.

"It would be extremely difficult for any big financial deal to come through right now," he said. "It's pretty much closed for business for them."

Lehman Brothers
LEH
managed to raise $5 billion recently, Bask said, but the spread on their high-grade bonds has now widened by 15 basis points, indicating that investors want higher yields to reward higher perceived risks when lending money to the firm. Some of Lehman's other bonds have widened by 25 basis points this week so far.

Similarly, Goldman Sachs
GS, -1.86%
saw its spreads widen by 15 basis points on Wednesday and 44 basis on the week so far.

Among other corporate bonds which saw big moves in their corporate spreads are issues by JP Morgan Chase & Co
JPM, -1.56%
American Express
AXP, -1.49%
and Wachovia
WB, +0.24%

Away from financials, Home Depot Inc.
HD, -1.69%
also saw big moves in its spreads. Investors are waiting to see whether the home-improvement retailer will be able to receive financing for its latest share buy-back, according to Atkins.

Most sectors affected

With the entire corporate bond market now coming under pressure, raising money for any corporate borrowing needs is becoming harder.

On Wednesday, even a deal by health-and-hygiene firm Kimberly-Clark Corp.
KMB, -0.04%
to raise $2.1 billion in the debt market struggled, Bakst said.

"Kimberly-Clark shouldn't have been too hard but the market is now asking more concessions," he said.

Lehman Brothers and Citigroup Inc.
C, -1.64%
which were in charge of bringing the firm's bonds to the market, were forced to make "large concessions," offering yields 10 to 15 basis points higher than originally planned, Bakst said.

"Any new issue that's coming out, either high-grade or high-yield, is going to have to come with reasonable concessions to the market," he said. "Other sectors are going to feel the pain too. Recently, even energy and telecoms are starting to show cracks as well."

Europe might be hit, too

The delayed leveraged-buyout of Alliance Boots also suggests that credit markets are turning less friendly in Europe as well.

"Will there be big differentials for the LBOs and their underwriters between here and Europe, where syndicates tend to be more risk averse than here?" said Atkins of IDEAGlobal.

"That's going to be a big issue," he said. "If it's getting this bad in the U.S., it's going to be much worse in Europe."

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